Towards Evidence-based PolicySession 1&2 - DOC Indicator Portal training, Tshwane, August 2012.
Prof Alison Gillwald, University of Cape Town/RIA
OutlineNetwork industries
Separation of powers
Network industries and natural monopoly aspects
Changing market structure of network industries
Understanding evidence-based policy
Linkages between policy and sector outcome
Sector regulation vs. competition reuglation
Administrative justice - consultative policy formulation.
Perfect Competition
• Markets with ‘perfect competition’:• Structure and requirements:
• many buyers, many sellers• Complete transparency• Homogeneous goods• Conduct and performance• Incentives to lower prices and costs• Incentives to innovate• ‘Normal’ returns to firms in this risk-class
• But, there are market failures:• natural monopolies, • information asymmetries, • public goods etc
Network industries and natural monopoly aspects
• Historically, utilities considered ‘natural’ monopolies
• Natural monopoly exists if the least cost production of the total market demand is achieved by the existence of a single firm.
• Impractical or inefficient to duplicate
• Changes over time due to technological advances, from vertically integrated chain of supply to isolated network component
• Throughout the world: telecommunications, electricity, natural gas and water granted legal monopoly status
• More recently, natural monopoly restricted to grid
• Introduction of competition in other parts of the market, e.g. VANs in telecoms, electricity generation and retail etc
Changing market structure of network industries• Historically: public-owned vertically- integrated monopoly provision of
services, more recently:
• Competition in up- and / or downstream markets
• … + Vertical integration, or
• …+ Vertical separation with independent infrastructure, or
• …+ Joint ownership of infrastructure
• Competing vertically integrated firms
Why regulate? (1)• Public interest• Market absence of failure• Monopolies and natural monopolies • single seller, no substitutability, market entry and exist difficult• Reduced output, higher prices, transfer of income from consumers to
producers• Externalities• Spillovers- price of a product does not cost true cost to society• Information inadequacies• Continuity and availability of services• Tough and cream skimming
Why regulate? (2)• Anti-competitive behaviour and predatory pricing
• Public Good and Moral Hazard
• Scarcity and rationing - regulating short supply
• Distributional justice and social policy
• Market allocative efficiency to maximise welfare, but not within groups/individuals in society
• Rationalisation and co-ordination
Objectives of regulationPromote universal access to basic telecommunications services
Foster competitive markets to promote:
efficient supply of telecommunications services
good quality of service
advanced services, and
efficient prices
Prevent abuses of market power (excessive pricing and anti-competitive behaviour by dominant firms)
Create a favourable climate to promote investment to expand telecommunications networks
Promote public confidence in telecommunications markets through transparent regulatory and licensing processes
Protect consumer rights, including privacy rights
Promote increased telecommunications connectivity for all users through efficient interconnection arrangements
Optimize use of scarce resources, such as the radio spectrum, numbers and rights of way
Tools of RegulationPrice Regulation (Wholesale and Retail)
Rate of Return
Price Caps
Entry control (Licences)
Various types of licences with various powers and obligations
Vertical disintegration (e.g. AT&T)
Legislative prohibition: Rules compelling operator to provide interconnection and governing the provision of that interconnection (Unbundling of network components)
Transparency
Prescribing cost accounting procedures
Require operators to publish prices of products for usage baskets
Best practice regulation• Legislative mandate
• Accountability
• Due process
• Expertise
• Efficiency
• Trade off of claims
Dynamic issues in RegulationRegulatory lag: A lag between rate reviews = incentives for cost reduction under rate of return regulation, more profit...
Ratchet effect: The use of information on past profits in deciding future price caps lowers incentives in price cap regulation
Operator might act contrary to regulators objective :
Lowering the quality of access to the network (delay upgrades that allow rival to offer new services, degrading rival quality)
Increasing their access price to the network (refusing to unbundle network components, require rivals to get interface equipment)
Denying access to the network altogether (arguing that no spare capacity, tech choice that favours own operations)
Tying: Monopolist can make sale of regulated service dependent on purchase of unregulated service. This permits pricing above MC on unregulated service as tie prevents competitive entry
Regulatory sector reforms• Privatisation - attract investment for network extension, efficiency,
government revenues• Licensing competitive operators - expand range of service, unserved
markets,improve sector efficiency, drive down prices, stimulate innovation, government revenues.
• Transparent regulatory framework - increase credibility, gov revenues, market confidence, investment.
• Mandatory interconnection and unbundling of PSTN - remove barriers to competition
• Price cap regulation - incentive based, great efficiency, reduce regulatory lag.• Universal access - replace less transparent and potentially anticompetitive
subsidies.• Removal of barriers to international trade. (Intven 2000)
•
Exercise• Consider each of the sector reforms in the previous slide and consider if they
are policy, regulatory or operational reforms and how they have been implemented or not in Namibia.
References• Baldwin and Cave (1999)
• Evans (1995)
• Fukuyama (2005)
• Jordana and Levi-Faur (2004)
• Levy and Spiller (1996)
• Noll, R (1996)
• Moran, M (2002) Understanding the Regulatory State
• Pierre (2000)
• Majone (1997)
Why regulate? (2)• Anti-competitive behaviour and predatory pricing
• Public Good and Moral Hazard
• Scarcity and rationing - regulating short supply
• Distributional justice and social policy
• Market allocative efficiency to maximise welfare, but not within groups/individuals in society
• Rationalisation and co-ordination
Objectives of regulationPromote universal access to basic telecommunications services
Foster competitive markets to promote:
efficient supply of telecommunications services
good quality of service
advanced services, and
efficient prices
Prevent abuses of market power (excessive pricing and anti-competitive behaviour by dominant firms)
Create a favourable climate to promote investment to expand telecommunications networks
Promote public confidence in telecommunications markets through transparent regulatory and licensing processes
Protect consumer rights, including privacy rights
Promote increased telecommunications connectivity for all users through efficient interconnection arrangements
Optimize use of scarce resources, such as the radio spectrum, numbers and rights of way
Tools of RegulationPrice Regulation (Wholesale and Retail)
Rate of Return
Price Caps
Entry control (Licences)
Various types of licences with various powers and obligations
Vertical disintegration (e.g. AT&T)
Legislative prohibition: Rules compelling operator to provide interconnection and governing the provision of that interconnection (Unbundling of network components)
Transparency
Prescribing cost accounting procedures
Require operators to publish prices of products for usage baskets
Best practice regulation• Legislative mandate
• Accountability
• Due process
• Expertise
• Efficiency
• Trade off of claims
Dynamic issues in RegulationRegulatory lag: A lag between rate reviews = incentives for cost reduction under rate of return regulation, more profit...
Ratchet effect: The use of information on past profits in deciding future price caps lowers incentives in price cap regulation
Operator might act contrary to regulators objective :
Lowering the quality of access to the network (delay upgrades that allow rival to offer new services, degrading rival quality)
Increasing their access price to the network (refusing to unbundle network components, require rivals to get interface equipment)
Denying access to the network altogether (arguing that no spare capacity, tech choice that favours own operations)
Tying: Monopolist can make sale of regulated service dependent on purchase of unregulated service. This permits pricing above MC on unregulated service as tie prevents competitive entry
Regulatory sector reforms• Privatisation - attract investment for network extension, efficiency,
government revenues• Licensing competitive operators - expand range of service, unserved
markets,improve sector efficiency, drive down prices, stimulate innovation, government revenues.
• Transparent regulatory framework - increase credibility, gov revenues, market confidence, investment.
• Mandatory interconnection and unbundling of PSTN - remove barriers to competition
• Price cap regulation - incentive based, great efficiency, reduce regulatory lag.• Universal access - replace less transparent and potentially anticompetitive
subsidies.• Removal of barriers to international trade. (Intven 2000)
•
Exercise• Consider each of the sector reforms in the previous slide and consider if they
are policy, regulatory or operational reforms and how they have been implemented or not in Namibia.
References• Baldwin and Cave (1999)
• Evans (1995)
• Fukuyama (2005)
• Jordana and Levi-Faur (2004)
• Levy and Spiller (1996)
• Noll, R (1996)
• Moran, M (2002) Understanding the Regulatory State
• Pierre (2000)
• Majone (1997)
Objectives of policy & regulationPromote universal access to basic telecommunication servicesFoster competitive markets to promote:
efficient supply of telecom servicesgood quality of serviceadvanced services, andefficient prices
Prevent abuse of market power (anti-competitive behaviour by dominant firms)Create favourable investment climate/extension of networks and servicesPromote public confidence in telecom markets through transparency, regulatory, licensing processesProtect consumer rights (next generation rights)Promote efficient and seamless communications between competitive infrastructuresOptimise use of scarce resources - rights of way, spectrum, numbers.
Regulatory sector reforms• Privatisation - attract investment for network extension, efficiency,
government revenues• Licensing competitive operators - expand range of service, unserved
markets,improve sector efficiency, drive down prices, stimulate innovation, government revenues.
• Transparent regulatory framework - increase credibility, gov revenues, market confidence, investment.
• Mandatory interconnection and unbundling of PSTN - remove barriers to competition
• Price cap regulation - incentive based, great efficiency, reduce regulatory lag.• Universal access - replace less transparent and potentially anticompetitive
subsidies.• Removal of barriers to international trade. (Intven 2000)
•
Interplay between competition and telecom regulation• Regulation is ‘ex ante’ and competition policy is ‘ex post’ (except merger
control)
• Regulation tends to define market structure with impact on effective and potential competition
• Regulation is aimed at ‘mimicking’ competitive outcomes in the absence of competition
• As competition is introduced less regulation of certain aspects is required
• Generally upstream and downstream,
• Excluding access, safety requirements and technical standards
• Focus shifts from preventing monopoly abuse in retail to interconnection and public service obligation
Administrative Justice• Constitution - consultative policy formulation, bill of rights
• Legislative mandate
• Accountability
• Due process
• Expertise
• Efficiency
• Trade off of claims
Parliament
Ministry
Informs laws
Regulator &Competition Commission
Stake-holders/
Civil society/
Consumers, citizens,
operators, service
providers, academia,
unions
inputs
initiates & formulates
Policy Formulation
Process
inputs
Ministry of Communication develops overall policy for the telecommunications sector from which Department develops
strategies
It is required that the regulator and competition authorities are consulted and that public hearings are held before a policy is gazetted. Once it is a bill Parliament, through a multiparty
parliamentary committee, will also hold public hearings before pasing the law
Parliament
Ministry
Informs laws
Regulator &Competition Commission
Stake-holders/
Civil society/
Consumers, citizens,
operators, service
providers, academia,
unions
inputs
initiates & formulates
Policy Formulation
Process
inputs
The Parliaments passes laws based on policies
The Minister can provide policy directives to the regulator between major policy reviews.
laws
policy
directives
Parliament
Ministry
Informs laws
(institutional arrange-ments)
Regulator
Competition Commission
Universal Service Agency
Market Structure
conduct
laws
policy
directives
Civil society
Stake-holders/Consumers,
citizens, operators,
service providers, academia,
unions.
inputs
initiates & formulates
regulation
Policy Formulation
Process
inputs
The policy determines the institutional arrangement for the sector - the degree of autonomy of the regulator, competition commission
and USA - through the appointment process, funding, and delegation of powers.
The policy also determines the market structure through requiring the regulator to licence certain categories of operators/service
providers and exempting others. Market conduct is in response to the market structure and determines the nature of the regulation.
licensing
market failure
Parliament
Ministry
Informs laws
Regulator &Competition Commission
Market Structure
conduct
laws
policy
directives
Civil society/
Stake-holders/Consumers,
citizens, operators,
service providers,academia,
unions.
inputs
initiates & formulates
regulationPolicy
Formulation Process
inputs
Policy outcomes: competitiveness - choice, prices, quality of infrastructures, services and products
The performance of the sector - competitiveness reflected in access, range choice of services, price and quality - is the outcomes of the policy and legal framework and creates the conditions either
conducive to investment in the sector or not.
Comparative investment !in infrastructure
2001 2002 2003 2004 2005 2006 2007 2008
Kenya 9,13 10,47 23,28 12,72 18,93 21,56 16,60 19,21
Korea, Rep. of 134,55 193,69 108,01 112,32 117,89 137,70 141,17 128,65
Senegal 6,53 10,41 - 8,61 13,28 15,85 17,37 -
South Africa 31,10 15,74 19,02 - - - - -
Tunisia 22,00 31,26 41,20 41,56 26,83 29,55 22,35 29,32
Total annual CAPEX in telecommunications/population (in USD, including fixed, mobile and Internet services. It should include all operators) Source: ITU 2010, WB 2010.
Gaps in South African data reflect its failure to submit
data over several years to ITU for global indicator reports
Telecom investment & economic growth ! Correlations between telecom
penetration and growth - fixed, mobile, broadband.
! Causality?
! Network effects
! World Bank 2010 10% increase in broadband penetration a accelerates economic growth by 1.38% points.
2004 2005 2006 2007 2008
South Africa 5,17 6,38 7,43 .. ..
Senegal 6,84 7,81 8,96 9,75 ..
Brazil 3,37 4,15 4,62 4,61 ..
China 3,30 3,19 3,06 2,88 ..
India 2,28 2,42 2,02 .. ..
Kenya 4,34 4,74 4,05 6,05 6,32
Turkey 2,78 2,60 2,27 2,51 2,27
Tunisia 4,08 4,28 4,17 4,20 4,33
Korea, Rep. 4,62 4,67 4,70 4,65 4,72
Telecommunications revenue as % of GDP Source: World Bank, IC4D database 2010
http://databank.worldbank.org/ddp/home.do
Data gathering
Census, national household survey,ICT sector Survey
Demand Side Data
ICT Sector Performance Review
Supply Side Data
Indicators
POLICY & REGULATORYREVIEW
Data-mining and economic modelling-
Operators data, annual reports,
regulatory reports
ICT Satellite Account Macro economic
National Account, Labour Force Survey
Census, Community Survey, Household
Survey. ICT HH, Individual and SME Access and Usage
survey.
Review examples• RIA ICT Sector Performance Review
• Ofcom Communication Report
• WWW Internet Matters